As an investor you should keep your eyes open for opportunities. Usually, the third quarter is the best time to re-evaluate your stock portfolio. Ideally, a poorly performing stock should be replaced with one that is trading at a significant discount but pays an over-the-top dividend yield.
American Hotel Income Properties REIT (TSX:HOT.UN), or AHIP, for example, is a stock that flies under the radar but packs a massive 12.9% dividend. As it’s priced at only $6.70 per share, an investor could take a position today and be well compensated in 2020 and beyond.
Focus on an overlooked hotel market
AHIP invested in the U.S. hotel industry because of solid economic fundamentals and impressive year-on-year gains. Analysts predict this steady growth will continue. But it is the overlooked secondary U.S. hotels market that represents the sector’s greatest investment opportunities, and this is the REIT’s niche.
In 2016, the U.S. hotel pipeline report showed that select-service hotels comprised about 89% of all the U.S. hotel projects then under construction. Partnerships with the world’s pre-eminent hotel chains such as Choice, Hilton, IHG, Marriott, and Wyndham have fueled AHIP’s remarkable growth.
Bright business outlook
AHIP will be among the stellar REITs next year because of its solid earnings outlook. This limited partnership, which operates 112 premium-brand, select-service hotels in the U.S., will complete its project improvement plans (PIP) this year. As stipulated in each franchise agreement, AHIP must complete various property improvement plans within 18 to 24 months of acquiring a hotel.
The REIT started renovation projects last year with the aim of completing them within three quarters. Hotel operations were disrupted, guests were displaced, and, not surprisingly, revenue and earnings went down. The stock also underperformed in 2018 and Q1 2019. However, AHIP has now completed six PIPs — half the total number. There are still 1,485 guestrooms in 10 hotels to undergo renovations, which will be done in batches.
By Q3 2019, only 789 guestrooms will be up for renovation. All PIP projects are expected to be finished by Q4. So, AHIP’s average daily rate will improve significantly, starting in Q3 2019 and continuing through 2020.
Another growth driver is the re-branding of AHIP’s economy lodging hotels under the Wyndham brand. The re-branding will raise the occupancy rates in these rail hotels, as it will attract more guests outside the rail crews.
I am one of the many who see AHIP as a good risk and reward proposition. Its growth potential can sustain its monster dividend yield. AHIP’s valuation should increase once all PIP projects are completed and business picks up in 2020. Even if the stock price were to slide by, say, 10%, the 12.9% yield could offset the decline.
AHIP has a proven track record of investments. This REIT can generate value through the ongoing growth of its diversified hotel portfolio. The only threat would be a prolonged economic recession that could reduce occupancy rates and lead to dividend cuts. Other than that, the stock is a strong buy.
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Fool contributor Christopher Liew has no position in any of the stocks mentioned.